Eurobounce

                                                  Comments due by April 4, 2015

A lot of the recent data coming in show a substantial acceleration in European growth. And you know what will be coming next: claims that this (a) vindicates austerity and (b) shows that there is no reason to worry about Japanification.

Time, then, for some prophylaxis.

First, on austerity: one of the truly amazing and depressing things about the whole fiscal policy debate is the apparent inability of large numbers of supposedly sophisticated commentators to appreciate the distinction between levels and rates of change. Maybe it would help to note that the US economy grew 10.8 percent — that’s right, 10.8 percent — in 1934, but nobody would claim that the Great Depression was over? Nah, it won’t help at all.

Still, for what it’s worth: think of Keynesian economics as asserting that

GDP = multiplier*government spending + other stuff

Then if we’re looking at growth

Change in GDP = multiplier*Change in government spending + change in other stuff

Now look at euro area fiscal policy, as estimated by the IMF:

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There was a major tightening after the Greek crisis struck and Germany reverted to type, but there hasn’t been much further tightening recently. So there’s nothing especially troubling about a return to growth.

What about Japanification? There seems to be a widespread misperception that Japan spent its lost decade in a continual downward spiral, with never an uptick. Not so. There was, in fact, a return to growth in the mid-1990s that lasted until contractionary fiscal policy and a banking crisis led to recession, and another period of growth under Koizumi that, however, wasn’t enough to get Japan out of deflation:

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You really don’t want to take a short-run rise in growth as a sign that secular stagnation is no longer a worry.

Right now, I’d argue that Europe is benefiting a lot from the weaker euro, which is coinciding with a de facto, if unacknowledged, pause in austerity. But the downdrafts — shrinking working-age population, a single currency in a distinctly non-optimum currency area, and the intellectual rigidity of too many policymakers — remain. (Paul Krugman)

Don't Buy That Suit Yet !!!

                                         Comments due by March 29, 2015    
After more than a year of clearance items, markdowns and other price promotions, retailers are finally saddling up and trying to break consumers' addiction to discounts.

But will shoppers call their bluff?

According to analysts' store checks, the deep discounts that have plagued the retail industry—and slashed companies' margins in their wake—have moderated over the past few weeks, the result of lean inventory levels and a more confident consumer.

Mario Anzuoni | Reuters

Pants for sale at an Urban Outfitters store in Pasadena, California March 6, 2015.

Still, promotions remain elevated—something experts don't expect to abate any time soon.

"The core underlying issue has not changed … in that there's an imbalance of supply and demand," said Craig Johnson, president of Customer Growth Partners. "We believe that this is going to be a promotional spring, just like it was a promotional holiday."

Don't expect a deal here

Retailers running the gamut of categories, including teen labelAmerican Eagle, women's specialty store Express and leather goods firms Coach and Kate Spade have all recently pulled back on their promotional strategies.

At American Eagle and Express, shoppers have continued making purchases despite a reduction in discounts, whereas Coach is preemptively pulling back on its promotional cadence in hopes of restoring its reputation as a must-have brand. Similarly, under the new leadership of CEO Brian Cornell, Target has focused more on the "expect more" aspect of its "expect more, pay less" strategy.

And strong demand for activewear, a category in which women's sales increased 8 percent last year, has allowed companies including Under Armour and Lululemon to maintain their premium pricing.

"The segments of apparel land where there's strong growth, you're not seeing [promotions]," Johnson said.

Retailers have also been less aggressive with their email blitzes. According to data from Experian Marketing, 52 percent of retailer mailings had offers in the subject line over the holiday season; that number fell to 44 percent in January, and dipped further to 37 percent in February.

That's not to say that things have leveled off across the mall. According to Sterne Agee analyst Ike Boruchow, who tracks promotions across 46 retailers and their websites, the first two weeks of March offered a smaller percentage of "more promotional" events compared to a year ago. Still, only 27 percent of the names tracked were regarded as "less promot

Boruchow noted increased discounting at Gap's namesake and Old Navy brands, as well as at Michael Kors. Other analysts cited deep promotions at Abercrombie & Fitch and Hollister, as well as Ann TaylorLoft.

"Despite the sequential improvement, the absolute level of discounting remains elevated," Boruchow wrote in a note to investors.

Shoppers, don't worry just yet

While promotions have eased over the past few weeks, consumers don't need to wave goodbye to the steep discounts they've grown accustomed to. Analysts point to delayed spring deliveries—a result of the backlog at the West Coast ports—and an earlier Easter as two potential catalysts for deals into April.

There are also several fundamental changes that will keep the sales rolling. For one, the popularity of off-price and fast-fashion stores will continue to put pressure on full-price stores. One example is Abercrombie & Fitch's A&F Essentials line, which took the price on basic T-shirts from $30 to around $15, Johnson said.

For another, despite some consolidation in the industry—including trimmed store fleets and recent bankruptcy filings from brands such as Delia's and Coldwater Creek—there are simply too many apparel stores out there, Johnson said.

That leads to a lot of sameness when hopping from store to store, Johnson said. Therefore, aside from retailers that offer differentiated merchandise or a limited quantity of items, shoppers are savvy enough to know that if they wait a few weeks, they can get the same thing at a lower price.

"Nobody ever buys stuff at full price when it first goes onto the floor early in the quarter … because they see the pattern month after month, year after year," Johnson said. (CNBC March 16, 2015)

Income Inequality, one more time.

                                      Comments due by March 15, 2015

TOKYO – Six months after Thomas Piketty's book Capital in the Twenty-First Century generated so much buzz in the United States and Europe, it has become a bestseller in Japan. But vast differences between Japan and its developed counterparts in the West, mean that, like so many other Western exports, Piketty's argument has taken on unique characteristics.

Piketty's main assertion is that the leading driver of increased inequality in the developed world is the accumulation of wealth by those who are already wealthy, driven by a rate of return on capital that consistently exceeds the rate of GDP growth. Japan, however, has lower levels of inequality than almost every other developed country. Indeed, though it has long been an industrial powerhouse, Japan is frequently called the world's most successful communist country.

Japan has a high income-tax rate for the rich (45%), and the inheritance tax rate recently was raised to 55%. This makes it difficult to accumulate capital over generations – a trend that Piketty cites as a significant driver of inequality.

As a result, Japan's richest families typically lose their wealth within three generations. This is driving a growing number of wealthy Japanese to move to Singapore or Australia, where inheritance taxes are lower. The familiarity of Japan, it seems, is no longer sufficient to compel the wealthy to endure the high taxes imposed upon them.

In this context, it is not surprising that Japan's “super-rich" remain a lot less wealthy than their counterparts in other countries. In the US, for example, the average income of the top one percent of households was $1,264,065 in 2012, according to the investment firm Sadoff Investment Research. In Japan, the top 1% of households earned about $240,000, on average (at 2012 exchange rates).

Yet Japanese remain sensitive to inequality, driving even the richest to avoid ostentatious displays of wealth. One simply does not see the profusion of mansions, yachts, and private jets typical of, say, Beverly Hills and Palm Beach.

For example, Haruka Nishimatsu, former President and CEO of Japan Airlines, attracted international attention a few years ago for his modest lifestyle. He relied on public transportation and ate lunch with employees in the company's cafeteria. By contrast, in China, the heads of national companies are well known for maintaining grandiose lifestyles.

We Japanese have a deeply ingrained stoicism, reflecting the Confucian notion that people do not lament poverty when others lament it equally. This willingness to accept a situation, however bad, as long as it affects everyone equally is what enabled Japan to endure two decades of deflation, without a public outcry over the authorities' repeated failure to redress it.

This national characteristic is not limited to individuals. The government, the central bank, the media, and companies wasted far too much time simply enduring deflation – time that they should have spent working actively to address it.

Japan finally has a government, led by Prime Minister Shinzo Abe, that is committed to ending deflation and reinvigorating economic growth, using a combination of expansionary monetary policy, active fiscal policy, and deregulation. Now in its third year, so-called “Abenomics" is showing some positive results. Share prices have risen by 220% since Abe came to power in December 2012. And corporate performance has improved – primarily in the export industries, which have benefited from a depreciated yen – with many companies posting their highest profits on record.

But Abenomics has yet to benefit everyone. In fact, there is a sense that Abe's policies are contributing to rising inequality. That is why Piketty's book appeals to so many Japanese.

For example, though the recent reduction in the corporate-tax rate was necessary to encourage economic growth and attract investment, it seems to many Japanese to be a questionable move at a time when the consumption-tax rate has been increased and measures to address deflation are pushing up prices. To address this problem, the companies that enjoy tax cuts should increase their employees' wages to keep pace with rising prices, instead of waiting for market forces to drive them up.

Herein lies the unique twist that Piketty's theory takes on in Japan: the disparity is not so much between the super-rich and everyone else, but between large corporations, which can retain earnings and accumulate capital, and the individuals who are being squeezed in the process.

(Project Syndicate)